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Social and environmental goals: Why investors can have both

By Masja Zandbergen
4 minute read

The Sustainable Finance Disclosure Regulation (SFDR) asks us to choose whether a company contributes to an environmental or a social objective, however, this could lead to confusion that becomes greater than the intended clarification.

Sustainability issues are ingrained into contours for mainstream investing today and it is clear that social and environmental matters are intertwined. This can be seen in the widely accepted framework that targets social and environmental issues under sustainable development goals (SDGs).

Frameworks that had previously solely focused on the environment have developed to also include social issues and this appears not just as a climate transition, but in the development of the concept of a just transition.

The Earth Commission - Global Commons Alliance, for example, has expanded on the important planetary boundaries concepts to construct a set of new Earth system boundaries (ESBs). In addition to environmental limits, these ESBs include social metrics and social safety boundaries to minimise the harm caused by boundary breaches on human health and well-being, as well as addressing issues of fairness and justice.

Within the SFDR regulation, one of the many investment strategies requirements include setting up minimum commitments for sustainable investments that can contribute to environmental and/or social objectives. The European Commission advised that there must be no double counting of such sustainable investments, and where an investment contributes to both objectives, the investor must decide to which objective – environmental or social – the investment should be better aligned with.

As is well known, the SDGs provide a holistic base including targets on a number of sustainability issues ranging from social issues (hunger, education, health care) and environmental concerns (biodiversity, climate change, marine, coastal, and water-related ecosystems).

For identifying companies that promote an environmental objective, SDG 12 (responsible consumption and production), SDG 13 (climate action), SDG 14 (life below water), and SDG 15 (life on land) were considered relevant. Similarly, the SDGs identified as contributing towards social objectives were SDGs 1 to 11 and more specifically SDG 16 (peace, justice, and strong institutions).

These “social SDGs” are mainly related to issues targeting improvements to society and community welfare such as eradicating hunger, improving education, infrastructure, and health care. Given the higher number of social objectives, it is likely that we would see a higher number of companies contributing to a social objective.

A closer look at SDGs flags the complexities involved. It is commonly acknowledged that the 17 goals are interconnected, and actions taken to improve one objective do influence another SDG.

Further, several SDGs have both environmental and social sub-targets. For example, SDG 7 (affordable and clean energy) aims to provide access to energy for all (7.1 – a social goal), but also increase renewable energy generation and increase energy efficiency (7.2 and 7.3 – environmental goals). Similarly, SDG 6 (clean water and sanitation) aims to improve human health (a social goal) as well as reduce water pollution (an environmental goal). Thus, at the heart of this conundrum, lies the question whether a clear choice on environmental or social objective can be made.

Invariably, such categorisation also leads to assessment outcomes where companies could well be equally linked to both a social and environmental SDG. For instance, companies supplying insulation materials contribute to energy efficiency which is connected to an environmental goal (SDG 7) and a social goal (SDG 9: industry, innovation and infrastructure).

Another example is companies that supply salmon to consumers and thereby provide healthy food contributing to SDG 2 (zero hunger), which is a social objective. Under Robeco’s SDG framework, such companies will only be positively scored on SDG 14 if they adopt environmentally friendly practices that can be verified with high certification levels (the ASC for fisheries and/or MSC for wild catches). If so, they can be classified as serving an environmental objective, even with a product that also serves a social intent.

We can find many other examples of companies for whom the social and environmental contributions they make through their products or services are intertwined.

Masja Zandbergen, head of sustainability integration, Robeco